Ultratech Cement’s board approved the acquisition of 21.2 million tonnes per annum (mtpa) cement capacity from Jaiprakash at a marginally higher consideration (+ Rs 3 bn). The purchase consideration will be paid through a combination of redeemable preference shares and debentures.
The total consideration to Jaiprakash Associates works out at Rs 28.2 billion and to Jaypee Cement Corporation at Rs 18 billion. This essentially means that Ultratech will assume a debt of Rs 120 billion in its books.
The acquisition will help consolidate the industry besides increasing the already dominant presence of Ultratech. It will meaningfully increase Ultratech’s market share in the central, north and south regions.
At the acquisition value of $116/ton, it is at 43% discount to the current trading multiple of Ultratech. The acquisition has long-term benefits, but rich valuation (15X FY2017E EBITDA) prevents us from taking a constructive view on the stock.
We expect the acquisition to be earnings dilutive in the initial few years. Operational capacities of Jaiprakash were at 65% utilization in FY2015 and earned EBITDA of Rs 6 billion; current EBITDA is below Rs 600/ton against `920/ton for Ultratech. The management said they would start a re-branding process including quality changes to bring realisation at par with that of Ultratech cement in the first few months.